Break Even AnalysisBreak Even Analysis

[Chapter 9]

ObjectivesObjectives Upon completion of this chapter students will be able to:

Identify different type of costs.Define type of costs.Contribution Contribution and Variable RateUnderstand break-even pointAble to solve the chapter’s problems.

Type of CostsType of Costs

Two type of costs are incurred to run a business: Fixed Cost – are those costs that has no relation with the sales

volume. Examples: – Depreciation costs, Interest expense, Property taxes, and others.

Variable Cost – are cost that has linear relation with sales volume. Examples: – Food Costs, Beverage costs, Salaries and so on.

ContributionContribution

Contribution or Gross Profit :

Revenue – Variable Cost = Contribution

Net Profit =Contribution (Gross Profit) - Fixed Cost

Profit & Loss StatementProfit & Loss Statement

Revenue (Sales)Less : Variable CostContribution (Gross Profit)Less: Fixed CostNet Profit

Example: Sales of a Company is $100,000

Variable Cost is $70,000

Fixed Cost is $20,000

Find Gross Profit and Net Profit?

SolutionSolution

Sales $100,000

Variable Cost $70,000

Contribution(GP) $30,000

Fixed Cost $20,000

Net Profit $10,000

Contribution and Variable Rate ( %)Contribution and Variable Rate ( %)

Contribution

Contribution Rate = ___________ X 100

Sales

Variable Cost

Variable Rate = ______________ X 100

Sales

ExampleExample

Sales $100,000 Variable Cost $70,000 Contribution(GP) $30,000 Fixed Cost $20,000 Net Profit $10,000 Variable Rate = 70,000 X 100 = 70%

100,000Contribution Rate = 30 %

ConclusionsConclusions

Variable % + Contribution % = 100%

Variable Rate + Contribution Rate =1

Contribution Rate = 1 – Variable Rate

Total Cost = Variable Cost + Fixed Cost

Total Sales = Total Cost Called BEP BEP - Break Even Point

Break –Even - AnalysisBreak –Even - Analysis

Purpose– To establish the sales level required to

cover all costs.

Required Tools– We need to have Fixed Costs– We need to have Contribution Rate or %

– BEP = Fixed Costs (FC)–Contribution Rate (CR)

Fixed Cost=$5,400Variable Costs=$15,000Sales = $20,000 Find Sales to break – even?

Fixed Cost=$5,400Variable Costs=$15,000Sales = $20,000 Find Sales to break – even?

Step 1) Find Variable Cost % (Rate)

– VR = VC/ Sales = .75 or 75% Step 2 ) Find Contribution Rate

CR = 1- 0.75 = 0.25 Step 3) BEP Sales = FC / CR

BEP Sales = 5,400 / 0.25 = 21,600

Please Complete Exercises on Page

97 and 98

Please Complete Exercises on Page

97 and 98